Select Committee on Trade and Industry Minutes of Evidence


Examination of witnesses (Questions 300-317)

MR DOUGLAS ALEXANDER, MR DEREK DAVIS AND MR MARK HIGSON

TUESDAY 7 MAY 2002

  300. That would be very helpful. If I could take that one step further. In the exercise of its role as the shareholder that is not something which DTI Ministers do collectively? The Secretary of State presumably would always be involved in the exercise of the power of the shareholder?
  (Mr Alexander) I would not want to talk in the generality but I can tell you in the specific I worked extremely closely with the Secretary of State during these discussions. Indeed, it is one of the areas where both of us were appointed to our respective positions in June of last year and there was a meeting held. There was an approach made to us, as I say, by Consignia at that stage that they wanted exploratory talks to be taken forward. To be honest, I cannot remember but it was probably the Secretary of State who signed the letter in July indicating that we would accede to these exploratory talks being taken forward in formal discussion. In terms of who has been working on the detail of this, clearly it was myself in terms of my responsibility for postal services and also the Secretary of State was given report of these matters under discussion.

  301. Have you authorised or have Ministers authorised the management of Consignia to enter into any other discussions of a similar nature with any other party?
  (Mr Alexander) No. I would also say that Allan Leighton discussed this and we reached agreement that talks should not be taken forward in March of this year. In terms of his appointment as Chairman we have made clear to him that there is a very significant responsibility for him in terms of sorting out some of the challenges that were described previously so in that sense the focus of his work and the focus of Consignia is dealing with all the issues we have been discussing previously.

Chairman

  302. Can I go back to a couple of points. You said to us that what was the subject of discussion was the Royal Mail and Parcelforce elements of Consignia. Roughly how much are these bits of business worth? I should know but I do not.
  (Mr Alexander) To be honest, in terms of valuation in these negotiations, as I am sure you will appreciate, there is a degree of sensitivity.

  303. Let me put it in a slightly different way then. In the terms of reference of the letter which you or the Secretary of State signed—and I am obviously paraphrasing because I have never seen it, and I am trying to grope my way towards it—was it seen that a merger was the desired outcome or was it seen that a takeover would be a possibility? Perhaps not the prefered option but an acceptable one?
  (Mr Alexander) As I recollect—and, forgive me, I do not have the letter in front of me—the discussions involved a merger, as I say, both of the Parcelforce element of business but also of Royal Mail. It would have been a very significant undertaking.

  304. If we are talking in terms of a merger, and not talking in terms of sums of money but talking in terms of proportions, am I right in saying that the parameters for a merger are that one side should constitute no more than 60 per cent and the other no less than 40 per cent of the new body that would be established. Is that correct?
  (Mr Alexander) Tempting though it is to be drawn into discussions—

  305. It is a question of fact.
  (Mr Alexander) Forgive me, if I can try and explain. I would be very hesitant to discuss before the Committee any of the particular details around valuation given the sensitivities of the issue. In terms of the position of around 40 and around 60, my understanding (although, as I say, it is an understanding and perhaps if it would be helpful I will write to you) is that broadly those figures are taken within the City as being a reflection of a merger rather than a takeover.

  306. We were a wee bit disappointed because the impression we got from Mr Roberts from Consignia was that there were a couple of chats. We got the impression that someone jumped on a plane and went over to Amsterdam, had a blether, came back and said, "I do not think it is a very good idea." The fact it took eight months to get to that position is another matter. At the time, to be honest, we were not very well briefed and we are not very well briefed at the moment because you are not telling us very much! If I can get back to the point, however, if you have a thrusting, effective Dutch-led international postal service and you are a rather beleaguered and in some areas under-invested British postal service cum Parcelforce which is renowned only for its poor service and bad profits or non-existent profits, if you are going to have a merger there it might be rather difficult to achieve and so, figures notwithstanding, would a takeover by the Dutch have been a politically acceptable outcome to the discussions we were talking about?
  (Mr Alexander) First of all, we did not reach a view in terms of the public interest because the discussions did not reach that far. In terms of the original remit it was in terms of a joint venture and certainly not in terms of a takeover. That would be the starting point. Perhaps it might be helpful—and I am appreciative of your sensitivity to some of the disclosure issues - if I explained some of the thinking behind our acceding to those discussion being taken forward at all, given the rather uncharitable description of the strategic rationale for it that you have just offered. There had been a view (and this was expressed by this Committee in 1998) that we were missing significant opportunities in the post office internationally and that we needed to seek to catch up with some of our potential major international competitors in a liberalised market-place. The Dutch post office, as you indicated, is a highly successful business. It has a tremendous record not just in terms of recent productivity but in terms of industrial relations. It is a well-run and well- managed operation. There was a view, and it was at least worthy of consideration, that we give thought to exploring discussions with Consignia to inform those discussions whether there was scope for a joint venture leapfrogging the competition in terms of giving us some of the advantages that being part of a complete distribution company internationally could have offered. If you look at the high value markets that the Dutch are in, their excellence in terms of logistics, there would have been some issues that were at least worthy of consideration, given some of the problems you have described with Consignia. You were right to identify value for money as being an important consideration in all of these factors. That was clearly an issue for Consignia itself in terms of the commercial discussions that were being had and which were weighing heavily in terms of any deliberation which we ultimately made, which as it transpired we were not obliged to make because the deal did not come to fruition.

  307. Businesses can change because of a variety of things. Two options would be a merger or an acquisition. The acquisitory power of Consignia by the Act is somewhere of the order of £75 million, is it not? That is as far as the boat can be pushed out without other things being brought in. Obviously you could not acquire the Dutch postal service, therefore it had to be a merger, and what I am not very clear about is whether the rock on which these discussions foundered was that you did not get on with them at the end of the day or alternatively that, in fact, Britain and its Royal Mail and Parcelforce was going into this as the junior partner in what would ultimately be seen not as a merger but as a takeover such was the beleaguered and debilitated state of Consignia's Parcelforce and letter delivery service.
  (Mr Alexander) My starting point would be to emphasise the fact the discussions being taken forward from last summer to March were on the basis of a joint venture and not on the basis of a takeover.[3]

  308. If the joint venture could not be a joint venture because of the difficulties in valuation then it would have been a takeover and that would not have been politically acceptable.
  (Mr Alexander) I would make the point to remind the Committee that Ministers were not in the room during these discussions.

  309. I am sure you had a glass to the wall. You would not have been doing your job if you did not.
  (Mr Alexander) It is fair to say we were involved in those discussions and there was a range of issues on which this deal foundered which included regulatory issues and which included industrial relations. There are a range of different factors which in terms of assessing—

  310. You are not going to tell me that the Dutch have worse industrial relations than Consignia?
  (Mr Alexander) I do not think they have had a strike in ten years.

  311. Exactly, so we can set that one aside. The one-day general strike might have been an option but apart from that what are the other ones?
  (Mr Alexander) There were a range of issues including industrial relations, and discussion on valuation of course formed a central part of the negotiations that took place, but I would not be in a position to put numbers against that. I am sure you appreciate that because of what were highly confidential discussions being taken forward between two potential parties.

  312. We will finish on this point. If it were not possible for it to have been a merger, and it certainly was not possible for Consignia to acquire the Dutch post office, then am I right in saying that it was a political non-starter?
  (Mr Alexander) You are inviting me to answer a hypothetical question. If you were to tell me that the Dutch post office will appear tomorrow and say, "We want to take over the Royal Mail" or whatever part of the Consignia business, that really is a separate question from what happened last March which was on the first hand that there could not be agreement reached between the parties on a range of different issues, which I regret are covered in terms of the confidentiality agreement that was reached to start these discussions but, secondly, we would clearly have retained rights as Ministers to deliberate upon any potential deal as to whether it advanced the public interest. Factors we would have weighed in the balance would have included the ability to deliver benefits for the company itself, its customers, its workforce and taxpayers. There would have been a range of factors but we were never called upon to exercise that judgment.

  313. I am just trying to think of what the paragraph would be in the report that we would produce on this matter. I am inclined, and my colleagues might just nod in agreement or not, to say that: "The Committee was not convinced that the discussions with the Dutch post office and final agreement foundered on anything other than a difficulty over valuation and the likelihood that it would be very difficult for a British Labour Government to sell such a deal to the country."
  (Mr Alexander) Of course, it is the right of the Committee to draft the report as it sees fit. I am merely reflecting the fact that issues that were very live and had not reached agreement between the parties included, for example, industrial relations and the degree of risk inherent in that and issues in terms of the regulatory framework which were potentially present. Were the Committee to see fit to draft such a paragraph, what you are convinced by or not is your domain, but I would certainly hope it would be reflected that the Minister indicated that there was a range of factors not agreed between the parties. The other point it would perhaps be helpful for me to make is it is appropriate and consistent with commercial freedom that management be given the scope to have these discussions. Equally, on reflection, when one considers some of the acquisitions that have been made historically, there are questions which could be asked of management in terms of the wisdom of those individual commercial judgments. There clearly has been a process of learning under way in terms of the operation of commercial freedom but the approach we adopted here was reflective of the right balance, which is, on the one hand, to allow talks to take place, and if there was a compelling strategic rationale for this deal to be done according to the management then it was right that we give them the scope to explore it. On the other hand, it was equally right that as Ministers we retained the right to exercise our ultimate judgement in the public interest were such an agreement to be reached (which in this case was not the case).

Sir Robert Smith

  314. To avoid management going round in circles, would it not help them to know in principle whether you had any objections to them selling equity in the company?
  (Mr Alexander) The acceptance that they could take part in exploratory discussions had been on the basis of their approach to us in the summer of last year when a joint venture was mooted. There had been form with this in the sense there will be a joint venture on a much, much smaller scale in terms of the international mail with both TPG and Singapore Post. In that sense to what we gave our assent was discussions focusing on the potential for a joint venture.

  315. Currently you draw the line at selling the company or part of the company?
  (Mr Alexander) Two issues. First of all, it is a question of what should be the focus of management at the moment and, frankly, I do not think it should be either on acquisitions or individual strategic partnerships but I think it is appropriate for us to say that the commercial freedom that they have been granted leaves it open to them to come forward in the future with proposals that they think make sense. We will equally make a determination in terms of public interest at any point in the future when such proposals are brought to us. It would be fair to say the focus of management, in agreement with us, should be on getting the company on a stronger foundation. In that sense there is a stream of work which was being taken forward from last summer with our agreement in terms of strengthening management information, strengthening the board and trying to make sure a decision that needs to be taken could be taken. At the same time there was clearly a management focus on one strategic answer to some of the challenges that this company faced. We were willing to accede to those discussions being taken forward because they convinced us it was at least worthy of the consideration to answer some of the problems historically identified not least by this Committee in terms of the work of Postcomm. At the same time we were developing work being taken forward in the autumn of last year in terms of putting the company on a stronger foundation. In that sense when it became clear in March of that year that there was no common ground between the two organisations, we were in a position very quickly, with the appointment of Allan Leighton as Chairman of the organisation, to take forward other steps that needed to be taken. Those were painfully difficult decisions in terms of the first stage of renewal of the company that followed on very quickly from the basis of work that was being taken forward, particularly in that case Parcelforce. There is now a stream of work being taken forward in terms of strengthening the organisation.

Mr Lansley

  316. You will be aware that the interests of management and the interests of shareholders can differ. Although you said you were not present and Ministers were not present at these discussions that took place, it would not be without precedent inside the Department of Trade and Industry for such discussions to happen where officials were present or indeed where the Department appointed its own advisers to be present so that before the discussions ended Ministers could conclude whether there was some value to be gained for shareholders which was being subject to a negative view from management because management were trying to protect themselves rather than the interests of shareholders. Can you tell the Committee that you feel confident that all the opportunities that might have been available to the Government as shareholder were fully examined, whether or not they were desirable from the point of view of Consignia management?
  (Mr Alexander) I will make two points. First of all, if you look at the report that was produced in terms of the acquisition of German Parcel, there was a clear direction to the DTI to make sure it had the expertise and strength to give exactly the kind of advice that you have just suggested. Secondly, prior to your arrival at the session this morning I had already accepted before the Committee that there are circumstances in which, not least in terms of the proposals to the regulator, there may be divergences in the ability of the company to articulate its own management point of view and the broader public interest articulated by the Government. Consistent with exactly that, we did appoint advisers to ensure that we were adequately briefed in terms of what would be our interests as shareholder from any potential deal that was taking place.

  317. And before discussions closed you took that advice as to whether there was scope for discussion beyond what the management was advising?
  (Mr Alexander) We were receiving advice from our advisers about the discussions. The nature of these discussions are probably well-known to you. In that event the pace and speed with which decisions are reached can also be very fast. In this case it turned out that agreement could not be reached between the principal parties involved but we had the safeguard of independent advice to ensure that the interests of shareholders were protected in terms of the discussions.

  Chairman: Thank you very much. We are very grateful for the time that you and your colleagues have given us this morning. We appreciate the timing of this because we realise that you want to make sure, as you said at the beginning, that you cover all the corners. I think that is important because we realise also that a number of other committees seem to have what we would consider undue interest in matters which are essentially of a departmental character and we are rather jealous of that privilege. We are also very grateful to you. You have been as frank as you can reasonably have been expected to be. That does not mean we cannot keep asking you questions to which you are not going to tell us the answers! We will labour on in the vineyard and hopefully at the end of the day we might see a better postal service because that is what we are wanting to see.





3   Note by witness: You will recall that I said that my understanding was that respective shares of 40 per cent and 60 per cent in a new company would be taken within the City as being a reflection of a merger rather than a takeover. I agreed to clarify this. I understand that the conditions which have to be met before a business combination can be treated as a merger and governed by the Companies Act 1985 and by Financial Reporting Standards 6 (FRS 6). FRS 6 contains five criteria, each of which has to be met before a transaction can be treated as a merger. These are: consideration of the roles played by the combining parties; dominance of management; relative sizes of the parties; the scale of non-equity consideration; and the treatment of minorities. In respect of the relative sizes of the parties there is a rebuttable presumption that if the relative sizes fall outside a 60 : 40 range the transaction cannot be considered a merger. Back


 
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